RBI steps in to make ARCs more accountable

RBI has been tightening the regulations which are good for the industry. If the asset reconstruction firms continue to buy bad loans and rely mainly on the management fee without focusing on the resolution of assets, the very purpose for creation of ARCs is defeated

- Pallav Mohapatra, MD & CEO, ARCIL

Mumbai:To increase the accountability of the asset reconstruction companies (ARCs), the Reserve Bank of India (RBI) has started tightening the norms for them.

In the past, banks and financial institutions which sold non-performing assets (NPAs) to ARCs paid the management fee directly to them irrespective of the recovery happened from those assets or not.

But, RBI not only stopped this practice, but also made it clear that management fee would be paid to the ARCs out of recoveries only. Moreover, RBI emphasised on corporate governance in ARCs. For this, RBI turned to a circular which it had been issued last year. Also, RBI said that the chairman of the board of such companies will be in independent capacity.

Besides, RBI said that the formation of an independent advisory committee was a must for one time settlements.

Now, with the new regulations in place, ARCs would have to change their business model, experts feel.

Talking to Bizz Buzz, Pallav Mohapatra, Managing Director & Chief Executive Officer, Asset Reconstruction Company (India) Limited (ARCIL), said: “RBI has been tightening the regulations which are good for the industry. If the asset reconstruction firms continue to buy bad loans and rely mainly on the management fee without focusing on the resolution of assets, the very purpose for creation of ARCs is defeated.”

Hari Hara Mishra, CEO, Association of ARCs in India, says, “RBI had constituted a committee (Sudarshan Sen Committee) to review the functioning of ARCs and suggest suitable measures to strengthen the ARC sector. RBI has already accepted some of the recommendations and issued guidelines.”

The sector is waiting for few more guidelines to come out which will enhance functional effectiveness of ARC sector. These measures will help better role play of ARCs in absorbing emerging stress in the system, SMEs and unsecured retail in particular, he said.

In case those proposals, drafted by Association of Asset Reconstruction Companies in India, are approved, it is all set to increase liquidity and attract offshore investors in days to come, he added.

The proposed changes are likely to increase the types of entities who trade instrument called Security Receipts (SRs), which are backed by non-performing loans and issued by trusts of ARCs. Currently, this business is confined to banks and non-financial companies.

If ARCs issue SRs and there is no recovery happening for years altogether, then in such a case the banks that have invested in the SR trusts, will be having difficult time. Hence, for trading of such SRs, there should be a sort of platform whose trading could take place on the lines of secondary market trading, some feel.

But, I personally believe that the market was not matured enough for such trading to take place in the secondary market, said Pallav Mohapatra of ARCIL.